A GUIDE TO WIP COSTING FOR AVERAGE COSTING METHOD

An Oracle White Paper December 2009

ABSTRACT ========== Under average cost systems, the unit cost of an item is the average value of all receipts of that item to inventory, on a per unit basis. Each receipt of material to inventory updates the unit cost of the item received. Issues from inventory use the current average cost as the unit cost. By using Oracle Cost Managements average costing method, inventory can be valued at an average cost, weighted by quantity (inventory cost = average unit cost * quantity). For make items, in an average costing environment, the value of any receipt into sub-inventory through WIP Assembly Completion can be derived using actual cost incurred or some predefined cost. A note on the same has been provided in this paper. An attempt has been made to understand the way in which cost of a make item is on Completion is derived for a manufactured item through this paper. This paper also provides an insight into the WIP Value Summary generated by transactions with different setups. SCOPE ====== This paper has been authored keeping in view an audience familiar with Oracle Cost Management in general and Average Costing method in particular. An attempt has been made to explain the functionality of how cost is relieved in WIP under Average Costing method with different setups. 6 scenarios have been covered using various possible setup combinations. OVERVIEW ========== Before we take off with the scenarios, an overview of a few topics has been provided to facilitate the understanding of the entire breadth of this paper. Cost Elements To begin with, let us look at the various cost elements present in Cost Management. The unit cost of any item is the sum of the costs of all the cost elements. There are 5 cost elements: Material Material Overhead Resource Overhead Outside Processing Cost Type A cost type is a set of costs uniquely identified by name. In Average Costing method, Average is the seeded cost type. The unit cost in this cost type is used for calculating the accounting value for any transaction. Apart from this, we define another Rates Cost Type, the cost of which will be used for resources and overheads. To determine the Rates Cost Type for a given organization, the Navigation is as follows: Inventory -- Setup -- Organization --Parameters -- Costing Information (T). Cost Incurred Cost Incurred is the actual cost that was incurred to build an assembly. It includes the sum of all the material transactions and the resource transactions that has taken place for a particular job.

Cost Relieved Cost Relieved is the cost associated with the make item at the time of Assembly Completion. This cost depends upon some setup combinations that will be studied in this paper. SETUP ====== Step 1: Define an Organization (Fig.1) Inventory -- Setup -- Organization --Parameters -- Costing Information (T). Organization Dallas Manufacturing M3 that already existed is chosen as the org for the test cases. This is an average costing organization. In the organization parameters, we set the Rates Cost Type. This cost type will be used for resources and overheads. For our test case we will use AvgRates.

Fig.1 Organization costing method and Rates Cost Type associated to the Org Step 2: Define a Resource (Fig.2) Billls of Materials Routings Resources A resource C-Res is created. Charge type is defined as WIP Move The Costed Flag is checked so that the resource becomes cost enabled.

A unit cost of 5 is given to this Resource in Pending cost type. For now, no cost is associated to Avg Rates cost type.

Fig 2. Resource Definition Step 3: Define a Department (Fig 3) Billls of Materials Routings Departments Department C-Dept is created. Resource C-Res is associated to it.

Fig 3. Department Definition and Resource association Step 4: Define an Assembly item Inventory Items Master Items Created Item C-Assembly (using the Finished Good Template) Gave Description 20GB Hard Drive Assigned the item to organization M3. Step 5: Define a Purchase Component

Inventory Items Master Items Created Item C-Comp (using the Purchase Item Template) Gave Description 20GB Hard Drive Assigned the item to organization M3. Step 6: Define a Routing (Fig 4) Billls of Materials Routings Routings A Routing is created for assembly item C-Assembly with one operation for department C-Dept Resource C-Res is associated to that department. Uasge Rate is given as 1.

Fig 4. Routing Definition Step 7 : Define a BOM (Fig 5) Billls of Materials Bills Bills A BOM is created for C-Assembly with a component C-Comp. Supply type of the Component is given as Push

Fig 5. BOM Definition Step 8: Perform a Miscellaneous Receipt (Fig 6) There will be requirement for component C-Comp while manufacturing the assembly item C-Assembly. We will perform a miscellaneous Receipt for the component to increase the inventory. Inventory Transactions Miscellaneous Transactions Choose the Transaction Type Miscellaneous Receipt and continue. Item = C-Comp

Subinventory = Stores Quantity = 100 UOM = Ea Unit Cost = 2 Give an adjustment account and the Save.

Fig 6. Miscellaneous Receipt Step 9: Define a WIP Accounting Class (Fig 7) Work in Process Setup WIP Accounting Classes WIP Accounting Class Discrete will be used for our test cases initially. Note that completion source is System Calculated and System Option Use Actual Resources

Fig 7. WIP Accounting Class Definition Step 9: Define WIP Parameters (Fig 8) Work in Process Setup Parameters The auto compute final completion flag is checked in WIP Parameters.

Fig 7. WIP Parameters Definition

TEST CASES We shall demonstrate six test cases. Each case would highlight certain points that would provide us with an understanding of how the WIP Costing logic works in Average Costing. Case1: Rates Cost Type : AvgRates WIP Accounting Class : Discrete Completion source : System Calculated System Option : Use Actual Resources Autocompute final completion : Checked No cost is associated to Avg Rates cost type for the resource as seen in Fig 2. Create a job C-1 for 1 quantity and Release it.

Perform WIP Component Issue for 'C-Comp'

Perform the Move transaction. The resource transaction would also have happened since charge type is WIP Move.

Complete the Job using WIP Assembly Completion.

Since Final completion is checked, all other setups will get over ridden and the Cost Relieved will be based on the Cost Incurred. Here cost incurred will be: Material - 2 Resource - 0

Now we will change the completion source as below

Case2: Rates Cost Type : AvgRates WIP Accounting Class : Discrete Completion source : User Defined Cost Type : Pending No cost is associated to Avg Rates cost type for the resource. Create a job C-2 for 1 quantity and Release it.

Perform the Move transaction. The resource transaction would also have happened.

Perform WIP Component Issue for 'C-Comp'

Complete the Job using WIP Assembly Completion by unchecking the Final Completion Flag.

Since the completion source is user defined, the Cost Relieved will be based on the Cost of the Assembly for the cost type defined in WAC ('Pending' in our case). Since there was no cost defined for pending cost type for the assembly item, the cost relieved is zero.

Here cost incurred will be: Material - 2 Resource - 0

Now define a cost of 5 for Pending cost type for the assembly item C-Assembly

Case3: Rates Cost Type : AvgRates WIP Accounting Class : Discrete Completion source : User Defined Cost Type : Pending No cost is associated to Avg Rates cost type for the resource. Create a job C-3 for 1 quantity and Release it. Perform WIP Component Issue for 'C-Comp' Perform the Move transaction. Complete the Job using WIP Assembly Completion by manually unchecking the Final Completion Flag.

Since the completion source is user defined, the Cost Relieved will be based on the Cost of the Assembly for the cost type defined in WAC ('Pending' in our case). Since there was cost of 5 defined for pending cost type for the assembly item, the cost relieved is 5. Here cost incurred will be: Material - 2 Resource - 0

Note: Once there is a completion done for a job with completion source as user defined, the completion source is non updatable for that WAC.

Now add a cost of 3 to resource C-Res for cost type AvgRates

Choose the WAC as Prototype

Case4: Rates Cost Type : AvgRates WIP Accounting Class : Prototype Completion source : System Calculated System Option : Use Actual Resources Unit cost of 3 is associated to Avg Rates cost type for the resource. Create a job C-5 for 1 quantity and Release it.

Change the charge type of resource to Manual through Job/Schedule Details.

Perform the Move transaction. The resource transaction would not have happened since charge type is Manual.

Perform WIP Component Issue for 'C-Comp' Complete the Job using WIP Assembly Completion. This time the final completion flag is unchecked by default based on the WIP Parameters setup.

Since the System Option is Use Actual Resources and there was no resource transaction performed, the cost relieved is just having the cost of the component C-Comp. Here cost incurred will be: Material - 2 Resource - 0

Case5: Rates Cost Type : AvgRates WIP Accounting Class : Prototype Completion source : System Calculated System Option : Use Actual Resources Unit cost of 3 is associated to Avg Rates cost type for the resource. Create a job C-6 for 1 quantity and Release it.

Perform WIP Component Issue for 'C-Comp'.

Perform the Move transaction. The resource transaction would also have happened.

Complete the Job using WIP Assembly Completion. Since the System Option is Use Actual Resources and there was a resource transaction performed, the cost relieved is including the cost of the component C-Comp as well as that of the resource.

Here cost incurred will be: Material - 2 Resource - 3

Change the system option to Use Pre-defined Resources

Case6: Rates Cost Type : AvgRates WIP Accounting Class : Prototype Completion source : System Calculated System Option : Use Pre-defined Resources Unit cost of 3 is associated to Avg Rates cost type for the resource. Create a job C-7 for 1 quantity and Release it.

Change the charge type of the resource to Manual

Perform WIP Component Issue for 'C-Comp'

Perform a move-complete transactions using move transaction form. The resource transaction would not have happened.

Since the System Option is Use Pre-defined Resources, hence even though there was no resource transaction performed, the cost relieved is still including the cost of the resource along with the Component cost. Here cost incurred will be: Material - 2 Resource - 0

White Paper: A GUIDE TO WIP COSTING FOR AVERAGE COSTING METHOD MAY 2011 Author: Christopher David Contributing Authors: N/A Oracle Corporation World Headquarters 500 Oracle Parkway Redwood Shores, CA 94065 U.S.A. www.oracle.com Oracle is a registered trademark of Oracle Corporation. Various product and service names referenced herein may be trademarks of Oracle Corporation. All other product and service names mentioned may be trademarks of their respective owners. Copyright 2011 Oracle Corporation All rights reserved.